Microsoft Corporation (NASDAQ:MSFT) J.P. Morgan’s 50th Annual Global Technology, Media and Communications Conference Transcript May 25, 2022 10:00 AM ET
Rajesh Jha – Executive Vice President, Office Product Group
Mark Murphy – J.P. Morgan
Okay. Good morning, everyone. I am Mark Murphy, Software Analyst with J.P. Morgan and it is an absolute pleasure to be here this morning with Rajesh Jha, who is EVP of Office Products Group with Microsoft. Rajesh, thank you so much for making the trip and being here with us.
Well, thanks for having me.
Q – Mark Murphy
So, perhaps, we can start by trying to put Office in a high level perspective. There have been many junctures we’ve lived through in the last 10 years to 20 years. People would basically assume that Office was pretty penetrated, right, pretty saturated. We look at it today. It’s a $45 billion business. It’s growing in the low-teens. If you think about the perspective on that, it’s larger than Oracle, it’s larger than all of SAP, it’s growing faster. So what do you view as the key ingredients or what do you think as the broader phenomena that are kind of driving this Office business to deliver such durable growth?
Yeah. I mean, our technology has evolved, but more importantly, the scenarios that we have focused on, as we’re working with our customers, taking a look at the trends. That has evolved over the years as well.
10 years, 12 years ago, when we started Office 365, our vision was, this is way before the pandemic, our vision at that time was to allow people to work from anywhere, any place, at any time, while delivering productivity in communications and collaborations solutions, but at enterprise-grade security and compliance.
And I think the thing that we got right early was really trying to work with our customers and get them to make transition to the cloud on their terms. And some choose to go all in into the cloud a decade ago. For the others, it was more of a hybrid setup, whether it’s some users moved to the cloud, some stayed on-prem or there was some workloads that moved to the cloud.
And then about five years ago, we really took a step back and we felt — by the way, the one thing that the cloud did was not just economies of scale, it was economies of skills, because as Microsoft, we took it upon ourselves to actually keep our customer updated and integrated, and that, because we got all the customers in the same version of all our products, it enabled a lot of new scenarios.
And that is what allowed us create something like Microsoft Teams. We would never have been able to create something like Microsoft Teams in a classic on-premises world. But in a cloud, all our customers were in the same base line of the different infrastructure.
So with Teams, we took a step back and we said, it’s not about the apps, it’s not about the devices, it’s about people and groups, and how do you bring sync and async communication collab together.
And then security and compliance, we knew was an area we needed to investment in, and as systems of record, and systems for engagement started to come together, we knew we had to invest in automation and so we have the Power Platform.
So, I guess, I would say, Mark, the thing was we taken — we’ve stayed with the word productivity, but we’ve taken a broader and broader perspective of that in Office. It was initially were information workers and even in information workers, you go back to Office way back when, people thought we were saturated, because Office was all about creation, Word, Excel, Power, but then it was about creation, it about collaboration and communication and security and compliance and automation.
And then we didn’t stop any information workers. 80% of the workers on the planet are first-line workers, are front-line workers. And as companies go through digital transformation, these front-line workers are incredibly important for productivity. So we’ve gone from information workers, knowledge workers, the front-line workers, small businesses and then the TAMs.
I — one of the things on productivity, I think, is the addressable market. We continue to grow the addressable market where creation tools, the collaboration tools, the security, the compliance, now we think about employee experience and productivity, especially in our hybrid world, how to those come together. So I’m incredibly excited to stay on this journey to define productivity at the individual level, at the team level, at the team level, at the org level.
It’s an amazing vision. Rajesh, when we look back on the March quarter, in aggregate for Microsoft, a very solid quarter. We came out of that. We raised our forecast for Office. In contrast, there were many software companies who saw a slowdown and investors now are concerned that, perhaps this whole demand environment was moving forward during the pandemic. We get these questions, if reopening caused Zoom to slowdown, right? Why didn’t it cause Teams to slow down, for instance? From your perspective, what impact did the pandemic and the lockdowns have, and as well as the pivot to remote work on this whole Office business?
Yeah. In the pandemic definitely accelerated the move to the cloud for many of our customers. I mean, the growth that we saw in Office 365 and Microsoft Teams, even small businesses, they had to really reinvent a new way of working and so we brought forward a lot of people moving to the cloud that were perhaps on the sidelines, and perhaps, not fully using the cloud and so we created things like trials to let them get onboard really quickly.
We created specific small business offerings like Teams Essentials, affordable collaboration, meeting tools, but our usage has never been higher, even coming out of the pandemic, it’s never been higher.
And so when people think, why is that the case? Well, with Teams it’s multimodal. Teams is not just meeting solution. With Teams, what we said was, hey, how do we make group of people collaborate, whether it’d be a project team or in the board room or a first-line worker working with their managers, how did they work? It’s synchronous and asynchronous. It’s across different time zones, at different shifts. It’s about people being either face-to-face or being distributed.
And so, even if the actual number of minutes and meetings goes down, collaboration, especially when you’re trying to go through a digital transformation, you’re digitizing business processes, the need for collaboration has never been greater and so usage of Teams continues to grow.
But it’s not just Teams and Office 365. If I take a look at the usage today in Office 365, it’s never been higher from other modules. Our customer that would use four of modules, now maybe using six of our modules.
But it’s not just the number of modules. The depth of usage of these modules continues to grow. And so, if you wonder why, I do think in a hybrid world, digital tools are — is where work will have to get represented, work will have to get done, that’s how collaboration happens. That’s how you work flexibly across different time zones and across pace and time.
So — and I think now that we have a strong base line and a growing base line of the usage and consumption, we continue to grow our — the scenarios that we want to serve our customers with, whether it’d be the Phone System in Teams, whether it’d be house space for, whether it’d be a focus room, or open collaboration space, a conference room, small, medium, large at different jobs, how we should that involve the Teams.
We thought about employee experience in Viva. How you balance productivity, wellness, learning, knowledge. And then devices become incredibly important and we try to virtualized devices with Windows 365. So the usage has never been higher and I’m excited about how we can continue to serve our customers in this hybrid world.
So, great to hear that usage has never been higher and I want to come back and touch on many of the products you just mentioned…
…including Phone Teams and devices. The — let’s start with an assumption for a moment that remote work and hybrid work are permanent societal shifts and this is going to be with us for a while. What are these types of differentiated experiences that you are creating currently that, perhaps, maybe we’re not even considering yet, right? As you try to help workers connect and collaborate the world?
Yeah. I mean a couple of things I would note. Just a couple of things I would note. Yeah. First, I do think this hybrid work, where individuals, one of the things that we recently released was our latest Work Trend Index and so we interviewed 30,000 information workers and first-line workers across 30 different countries. And then the other thing that we have with Microsoft 365 or Office 366 is massive amount of the signal. So we can see a lot of the data and the usage patterns and the communication patterns.
And so you would have heard us talk about this thing called a hybrid paradox, where three-fourth of the employees, they want flexibility in how they work, whether they work in their office space or they work elsewhere. But at the same time, two-thirds of these employees they also want more face-to-face time with their colleagues. So this is the paradox, three-fourth, they want flexibility, two-third, the same two-third, they say, hey, I want to be face-to-face and build off the energy.
The other thing that I’ll just say that was striking to me, even though in Q3, as I reflect on it, makes sense is, remote work, hybrid work tends to make strong ties stronger and weak ties weaker and that is important.
And why is that? So when you are not — and the serendipity, the water cooler, you’re coming out of a conference room, meeting, talking to somebody, who is not in the immediate work group, an immediate work group being a strong tie. But no matter how an organization sets up the org structure, what is not always done in a hierarchical manner, what has to train and send these boundaries. That’s all weak ties.
So what we are thinking about here is, just take Microsoft Viva, for example, it’s an application that’s built on Microsoft Teams, because Teams is about putting groups at the center, people at the center and bringing the right apps, the right data, the right AI, the right automation to people.
So the Viva we have — and hybrid work, you’ve heard about the triple bump of the day where people took three peeks, one before lunch, one after lunch and one in the evening before going to bed. It’s like productivity has to be balanced with their well-being. At Microsoft alone, a third of our employees started during pandemic.
How does in a world where our customers have higher attrition, new people joining remote work, how does the knowledge gets discovered and how do you create knowledge? How does that get discovered? How do you balance wellness effectively? How does learning take places in the flow of work? How different teams align on their core mission?
And these that the things, how does a front-line worker connect to their leadership? So these of the things that we think broadening of employee experience for this world where strong ties tend to get stronger, weak ties tend to get weaker, with these things have to come into the flow.
So I would say, Microsoft Teams and Viva, but there are other things we are thinking about, Documents today a super monolithic. How do you get the Documents to be the flow of communications, but also hand together as a Document with things like Microsoft Loop. So we got lots of things we got to do and we are going to learn and we’re going to literate.
You mentioned Loop at the end, correct?
I just want to make sure. It’s okay. We’ll come back to that as well.
So, Office 365 commercial is the bulk of the business. We recently ran a survey and it was showing us that are O 365 is going to exceed 60% penetration of all corporate employees, right, in the coming years, which is a very high number. You’ve had the seat count growth running around 16% for that in recent quarters and then you had shared this had hit $345 million seats of Office 365. So let me begin with a very simple question, how much runway do you see now for seat growth?
Yeah. I mean, just a growth we think about it in three different dimensions. So we can think about in three different dimensions. The first, let’s talk about what you said, seat growth. The seat grows, there are a billion information workers, the projections are like 20, 25 information and knowledge worker. There are a couple billion more first-line workers that are on the front-lines of this transformation of business processes. There are small businesses. There’s industry specific role offerings. There’s education. So we think broadly that we have lots of room here to grow the seats with Office 365.
Then the other dimension is the addressable market. So with Office 365, it’s not just about creation tools or collaboration tools or communication tools, it’s about security and compliance. It’s about employee experience. It’s about training — learning, it’s about knowledge management, it is about content management and it’s about how, even industries like Phone Systems, how do they evolve for the future? How does space evolve to allow hybrid work? So we think our addressable market is pretty broad. I mean, that’s a great thing about productivity is, like, it is what is the heart of the modern economy and so we always tried to take a step back and take a closer look at the productivity.
But finally I just say, I talked about usage and our usage has never been higher. And the more usage there is, the more our customers, you see that pay off and the renewals, lesser discounting, and then we have things, like, E5, which is a premier tier where we bring it all together for our customers and very early days of seeing that play out for our install base.
So your aperture is broader than a billion information workers, right? It goes well beyond that. You just mentioned E5 and I wanted to just touch on that for a moment. There is a sense of — there is so much value packed in to these SKUs, E3, E5, there’s been speculation on E7 coming at some point. Where do you think you are in the process of packing in more value into the SKUs and monetizing it?
I just say last year we said 8% of our install base are commercial Office which were installed base had moved to E5 and I like this still early. And remember, this is we’re talking information workers.
But we have, like I said, we aim to go broader with SMB and first-line worker and industry specific role offerings. And so the mix of how E5 plays out over time depends on the more FLWs we have, they’re probably not E5 users. Information workers quite early still in the — in that cycle.
The value — in terms of the value of the E5, I agree with you, I mean, there’s a lot for our customers there, not — our customers can choose to get not the bundle, they can choose to get just the security offering or the compliance offering or the Phone System offering or the analytics offering. They can choose to get out each one of these separately. But we think the value taken together for our customer with all of the E5 SKUs and many of them actually want to get the entire suite as its incredible value.
So, Rajesh, Teams is a part of that incredible value.
A couple of years ago Satya described Teams, I believe he said it’s the fastest growing app I have seen. We step back and we were thinking about that, it’s a pretty big statement, right? Because Office grew quickly, Outlook grew quickly, Exchange grew quickly. Earlier this year, I believe you had said Teams had crossed 270 million monthly actives, right? So it’s not too far behind the Office 365 commercial seats. How do you view the significance of Teams, if we step back and say, put this in a historical context for us? And what is it about that, that Teams experience that you’d say is fundamentally different than other competing products in the world?
It’s a great question, Mark. I mean, I’ve been in the Office — in and around the Office business a long time, and I would just say, Teams is remarkable. But I do think the fundamentals — you said what makes it different? What makes it different is the fact that it’s multi-modal. So it’s not about one modality of a meeting or one modality if a chat or one modality of creation.
It’s — with Teams, we take a step back and we said, what if we didn’t start with tool first, what we started with people first and groups first. And then when people congregate together, whether in a informal chat or a formal group or a channel, how do we bring the right modalities of chat and meetings and the Phone System and Documents and Files and Dashboards and Business Automation, how do we bring all of that together. So the tools find you, you didn’t go from tool-to-tool to do your job, and if there is group, a work group of 20 people and they are all independently seek different tools, that’s not going to work.
And so with Teams, I — what is remarkable is that, we see it as relevant in the board rooms, for a CEO and their leadership team taking a look at business performance and have a shared context as it is on the shop floor.
And we are seeing success, broad success. Recent CIO survey showed 50% of the CIOs are standardizing on Microsoft Teams and with three years that number was projected to get to about two-thirds.
But what is really remarkable with Teams is not the multi-modality application, the usage, is the fact that it’s a platform. That it’s a platform in an ecosystem that trancends a given device. So if you are an ISV or even Microsoft, like, we’re creating things like Microsoft Viva as applications in Teams.
If you write an application for Microsoft Teams, your application runs on the Windows, on the Mac, on the Web, on the Mobile Devices, iOS or Android. And so we have ServiceNow and Workday and Adobe and Monday.com and lots and lots of other ISVs.
In fact, if you take a look at the number of third-party and custom applications that have been built on Microsoft Teams, two years ago to now, it has grown 10x. And so the ecosystem is the real differentiation with Teams.
And an ecosystem also plays out in the devices side. We have Poly and Logitech and Zebra and all these folks were building devices that are optimized for Microsoft Teams. We have telco operators that are connecting their backplane to the Microsoft backplane. So a customer that wants Microsoft Teams Phone or collaboration or conferencing has no configuration to go to.
And then I feel this is just the base line and then we have differentiated point of view on how space — companies’ space evolves with Team rooms, how their phone system evolves, how employee experience evolves, and so, yeah, Teams is truly special.
So you said the tools find you.
And Teams Phone has been…
…has been finding a lot of people. Can you help us understand the strategy there? How far are your ambitions stretching out with Teams Phone and how would you think about the scale of that specific opportunity?
Yeah. I mean, see it’s a very interesting, like, it seems obvious now, but the Phone course makes no sense to be anchored to a desk anymore. Especially in a hybrid work, the phones got to be around the individual, it’s got to be around the person, and not are on the desk. And so a lot of customers do want to get from their legacy PBX systems to something that is much more person-centric setup for the hydro world.
The other thing about Phone is, it’s — people don’t — when you work with somebody, like three of are in a chat, you want to escalate that quickly to a phone call. Quickly to a synchronous modality and go back to the asynchronous modality. And so, there has to be a continuum between the Phone System and Collaboration.
Even when you start with a phone call you want to bring a whiteboard in, you want to be able to bring a shared — screen sharing, so you can actually communicate quickly. So we think there is a blending of a Phone offering that is person-centric and whether it’d be VoIP-based or PSTN-based, whether it’d be inside of an organization, whether it’d be across organization.
And so we see broad demand for phones across different industries of all shapes and sizes. And so, we have over 80 million people that use Teams Phones in all of these different flavors. The thing that is exciting to me is the time to value for customers.
Once they decide to get off their legacy PBXs on to the Phone System, the time to value is in weeks, in weeks they can get configured, because again the backplane is the same. Teams is multi-modal, you’re configured for Teams, you’re configured in your directory to add the phone is a question of weeks, it’s not years in the making. So hugely cost effective, flexible, multi-modal. And so, I think, we have a real differentiated perspective here with phones.
So when we look at how Office 365 is being purchased, 45% of that is purchase through Microsoft 365. And I think most people in the audience would probably think of Microsoft 365 as this set of very finished applications and services. But I have heard you refer to this as a — basically a rich developer platform, you’ve alluded to some of that foundation underneath it, Microsoft Graph, the Fluid Framework. Is there any way you can help make that tangible for this kind of non-technical audience and try to explain some of the differentiation?
Yeah. I think this is a really important point, Mark. I mean, Microsoft 365 is a set of finished services for sure. Time to value for customers, whether it be in creativity or solution or productivity or collab. We want to get the time to value to be really quite.
But, first and foremost, it’s also a platform, because Microsoft is not going to build every single productivity application project management application. So Teams is set up as a platform like I earlier talked about. You will find Zoom in the Team store. You will find RingCentral in the Team store. You’re going to find all sorts of project management and whiteboard companies in the Team store.
So at the UX layer alone the UI layer, we are a platform that people can plug in, because it’s really our customer’s choice at the end of the day on how they plug in. But even below the UX layer Teams has a platform at the data layer and we call the data layer the Microsoft Graph.
And Satya once said this and I think it’s a right characterization that Microsoft Graph is the most important database for any company. Because that database has all their — has all the company’s employees, who they work with, the meetings they are in, the documents that are shared, the documents that are trending, the projects and the deadlines to different people.
And this is the database on which Microsoft can run a massive amount of AI to give you both insights — deep insights and the right recommendation and the flow of work. And the Microsoft Graph is an extensible platform. So each one of Microsoft 365 applications write to the Graph, gets value from the Graph. But we allow third parties to also write to the Graph and get value from the graph. The Graph, of course, is owned by the customer and the right permissions have to exist and the right IT controls exist.
The other part of Microsoft 365 that is a platform is — how the user experience can be composable. And so we’ve done that ourselves today, with Microsoft Loop, we talked about Microsoft Loop, I’m really excited about Microsoft Loop. But Documents have tended to be somewhat monolithic and users go to Documents, of course, with Teams you can hang all the Documents around group. But with Microsoft Loop, we allow Documents to be decomposed.
So, for example, I got a project update and there’s a table that a bunch of us need to update, instead of telling everybody, hey, can you go update the table, I can take that table, that snippet of the document, put that in chat or email and send it out. And as people start to fill it, it’s always live. And when I go back to the Document, it shows the same state, if I’m in chat, it shows the same state, in email it shows the same state, if I were to take that component and put it in a Word document, it is always live and connected.
Now this is extensible, so third parties can participate in that too. So with Microsoft 365, finished services, focused on time to value, but we want to make it extensible and we have made it a platform both at the UX layer and the data layer.
So with this canvas and this surface area that you have, you’re describing to us the Graph data, the AI, you would seem to have an Advertising opportunity. And you had made this comment in January, the Advertising businesses over $10 billion in trailing 12 months revenue. That was an incredible stat. You’re investing in this area. Can you share with us how you think about your strategy in Advertising?
Yeah. As you know, it’s a large market and I think we are well positioned to play in this market. So a couple of things. Let’s start with, LinkedIn, LinkedIn Marketing Solutions. Now LinkedIn is like the highest trusted social network. And for customers, for advertisers, B2B advertisers, it’s — they have a really large engaged audience.
Now let’s take a look at Windows, 1.4 billion active devices. With Edge, we’ve started gain sharing. We have more room there to grow. And then with Microsoft Start, it’s like this personalized feed that is used by about 0.5 billion people and so you have curated content and content consumption, commerce, now we got the supply deal going. We are investing in scenarios.
What do people do on their PCs, the PCs have never been more relevant. People do shopping, they do learning, they do gaming, they do browsing. So we’re investing in those scenarios, both in Windows and with Edge.
And then, as you know, we recently completed our acquisition of Xandr. And then you take the deep audience intelligence that we have and the Xandr data driven platforms, we think we can accelerate this even more.
So these are the mainstream things, but you’re also exploring Advertising in other surfaces like Outlook, dotcom, our Consumer Mail offering or gaming, gaming is high engagement and we think it’s really interesting to see their new business models possible gaming. So, yeah, I think we are well positioned here.
So new business models, you had mentioned the theme of citizen developers using Teams and Power Platform at one of the recent build conferences. Personally I’ve been a bit of a skeptic on this whole topic of citizen developers. I’d say for most of my career, right, because we’ve — we never saw the — we never saw convincing signs and traction from it — from any other software company, and that is until now, right? So with the Power Platform that has been ranking number two in our product momentum, Microsoft Partner Survey Work, right, that we’ve been conducting. The signs are very clear. Can you put that into context? Why is there so much momentum and do you think that you finally cracked the code on this trend with the Power Platform?
Yeah. I mean, yesterday it was Microsoft Built and some really exciting announcements on our platform, an Azure, Data and AI Infrastructure. But even on Microsoft Teams, yesterday, we announced multiplayer sharing. Today, if somebody shares an Excel file with you or a video with you, you’re passively consuming it.
Now we’ve got true multiplayer gaming, like sharing going on as a core platform and other things in Microsoft Teams. If you’re an ISV, write an application for Teams, it also runs in Outlook and Office, new tooling in Visual Studio to create Teams apps.
But let’s talk about Power Platform. Very exciting announcement yesterday, where, today Power Platform has an ability to you can analyze with Power BI, so people can drive data driven, you can connect to all the business data to connectors and drive insights as Power BI, you can create new applications and act on it through Power Apps.
Yesterday, we announced that now it’s even simpler to create a Power App, you can just point it to an image of how the app should look. And it will — the AI will do most of the work of creating that for you the application for you. We have automation, the way to make business process automation.
And then we announced a new member yesterday called Power Pages, which is a business-centric data driven way to create a website. Now, look, the — why is this resonating, Mark, you said? It’s simply, no. I mean, I saw some staggering statistics, which is, there’s an expectation as customers go through digital transformation, that in the next five years, 500 million new applications are going to get created. That’s more than in the last four years.
So where are these developers going to create this 0.5 billion applications. IDC says today, there is a shortage of 4 million developers. So the idea behind the Power Platform is digital transformations happening. These applications have to be low code, no code. With Power Platform, we build all the connectors to all the systems of record databases.
So business person who’s closest to the business process can create draw insights, create these applications, create this Power Pages, automate business processes. I mean, I’m very, very bullish about how Power Platform can help our customers with a digital transformation. And understand that these Power Apps, again, are, when I say, Teams is an extensible platform, you can write a business process in Power Apps and consume it right in the flow. There’s an updating your business processes posted in the chat of inside of the Teams. You can consume that on your phone or on the desktop.
So in the very final moment, here, maybe we can do a lightning round question. And I wanted to touch on the topic on security and make sure…
… that we kind of wove this in, it is itself interwoven up and down the whole product stack. We see incredible momentum, security ranked number one in our Partner Survey Work. So it’s actually above Azure and it’s above Teams, which is interesting. Can you explain to us what is differentiating this Microsoft Security Solution versus the other products in the market?
Yeah. I could go on, but you said lightning round. So with Microsoft, we are on security cloud. works on multiple clouds, not just an Azure, but GCP and AWS, our Defender product works not just on Windows, but on all mobile platforms and all other desktop platforms. So we are multi-cloud, multi-platform, multi-device. But the real differentiation is how end-to-end it is? It talks about like our security cloud addresses identity, compliance, privacy, security.
And I would say, if you double click a level, what’s the differentiation? The differentiation is scale. We have 24 trillion signals every single day coming to our security cloud on which we can run AI and we can help our customers with these threats. And the threats have never been more, today, Microsoft tracks 40 plus state actors, 140 different persistent threat actors and even just a couple of years ago, it was in a handful.
So the level of scale, the level of insights, the trust that we have in the security cloud with over 785,000 customers betting on the Microsoft Security Cloud, so I would just say, end-to-end, trust, insights, scale.
And one last comment I’ll make, people think end-to-end means integration, and yes, but with our Microsoft Security Cloud, the individual components are also best of breed. We work to be both best of breed and best of suite.
Rajesh, thank you so much for being here with us and sharing all these wonderful insights and thank you…
Well, thank you, Mark.
It’s great to see you. Thanks.